Minimum Wage Question 12

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A dozen questions about the National Minimum Wage


Question 12 of 12

So, will the NMW actually reduce poverty and inequality?


It is not possible to state definitively what precise effect an NMW of R3,500pm in 2018/19 will have on the key metrics of poverty and inequality. On the one hand, some workers and their families will benefit, notably those who are currently earning less than R3,500pm, whose employers comply with the law, and who do not lose their jobs. There may even be some workers who do even better than that: if a firm currently employs five workers, four of whom are paid R2,000pm and one of whom is paid R3,000pm because she has more responsibility or experience, the employer may have to raise the fifth employee’s wages to more than R3,500pm if she is to maintain the differential needed to reflect her greater responsibilities.

So some workers will definitely benefit from the proposed NMW. If these were the only consequences, the result would be a reduction in poverty and some compression of the distribution of wages, leading to lower inequality relative to pre-existing patterns and trends. This report has argued that these are very unlikely to be the only effects of a high NMW, whose fallout will include some job destruction, some job opportunities lost (i.e. never created), as well as a likely reduction in GDP and an increase in price levels. While precise estimates cannot be derived for these effects, in all likelihood their combined impact on poverty and inequality will certainly dilute and possibly overwhelm whatever positive effects the NMW has on these.

The NMW and job destruction
It is worth emphasising that, while the Panel reports receiving a submission in which the effects of the NMW on employment are benign, it also received submissions from economists at two long-established and well-respected sources of credible data, UCT’s DPRU and the National Treasury. These models predict that between 200,000 and one million jobs will be lost. (see Question 8). Nonetheless the Panel insists that models aren’t always to be trusted and that the international evidence suggests that the direst predictions about the effects of minimum wages are seldom fulfilled. However, there is plenty of evidence in the Panel’s report to suggest that they themselves think it is more than plausible that some job destruction will occur (see Questions 7 and 9).

It seems clear, in other words, that there is every chance of job destruction as a result of the NMW, that the Panel actually recognises this, and that it has reconciled itself to this outcome.

What the Panel does not appear to have taken into account, however, is that, in addition to the potential of some job destruction in the short-term, it is inevitable that higher wages will lead both existing firms and those that are yet to be established, to opt for economic activities that require less unskilled labour and, in some cases, to relocate their operations to other countries. This trend, which is a key reason for SA’s already very high levels of unemployment, will mean that future economic growth will absorb fewer and fewer unskilled workers, leading to even higher levels of structural unemployment in the long term.

The NMW and GDP
To the extent that a high NMW reduces employment, it is very likely to reduce aggregate demand and GDP. This, however, depends to some extent on the number of people whose wages increase as a result of the NMW, and whether that effect will offset the reduction in aggregate demand attendant on job destruction. As pointed out in Question 11, any reduction in GDP (or in the rate of growth) could likely mean higher interest rates and lower tax revenues. Both effects will make it harder for government to afford the redistributive programmes it already undertakes or to afford the many investments that are needed to support faster economic growth. Lower GDP and a diminished capacity for the state to effect redistribution, will mean more poverty.

The NMW and inflation
The potential of the NMW to lead to higher prices was not discussed in the Panel’s report, though there is every reason to think that some higher costs will be passed on to consumers (see Question 11). To the extent that a broad increase in wages generates inflation, it will have even more ambiguous effects on poverty. For workers whose wages rise, it is likely that the increase in prices will not offset the full benefit of increased income. But for those who are not members of the working poor – whether this is because they are not poor or because they have no work – the resulting inflation will reduce purchasing power and lower living standards. The possibility that some of the increase in wages will be paid for by consumers, many of whom will have not derived any benefit from the NMW, appears not to have exercised the Panel.

The NMW’s effects on poverty and inequality
Despite the impossibility of offering precise estimates, it seems clear that the balance of risk is that a high NMW would increase rather than diminish SA’s already exceptionally high levels of poverty and inequality. This will be the result of a number of developments: job destruction in the short term and reduced labour absorption over the medium and long terms; likely reductions in GDP growth leading to lower per capita GDP; less redistribution through the fiscus; and higher inflation.

A sober examination of the proposed high NMW reveals unacceptably high levels of risk and a very high chance of exacerbating poverty, inequality and unemployment, while also slowing economic growth. Should a country in SA’s position with one of the highest unemployment levels in the world – close to 40% of the workforce – play Russian Roulette with the livelihoods of tens or hundreds of thousands of people?